Department of JusticeExecutive Office for United States Trustees

Final Agency ActionCase No. 01-0004

Review of the Decision of theUnited States Trustee for Region [redacted]Regarding [redacted]

[Redacted] ("trustee"), a member of the panel of chapter 7 trustees
in [redacted], seeks review under 28 C.F.R. § 58.6 of a decision by the
United States Trustee for Region [redacted] to terminate his receipt of new
case assignments. I affirm the United States Trustee's decision based upon the
record before me.

Course of this Proceeding

By a Notice of Termination dated August 24, 2001, the United States
Trustee terminated the trustee's appointment to the panel of chapter 7 trustees.
(1) The decision to terminate was set based upon the following:

1. Your failure to safeguard or to account for estate funds and assets;

* * *

2. Your failure to perform duties in a timely and consistently satisfactory
manner;

3. Your failure to cooperate and to comply with orders, instructions
and policies of the Court, the bankruptcy clerk or the United States Trustee;

4. Your substandard performance of general duties and case management in
comparison to other members of the chapter 7 panel or other standing trustees;
and

5. Your failure to file timely, accurate reports, including interim reports,
final reports, and final accounts.

The trustee timely filed a Request for Review dated September 12,
2001. He does not dispute any of the factual bases for the decision to terminate
other than to state that "I do not believe that the matters [set forth by the
United States Trustee in support of termination] rise to a level requiring termination."
Request for Review 1. The trustee contends:

While I am aware of areas in which there needs to be improvement,
I would state that "the Review would not put a reasonable trustee on notice
that his or her case administration was so seriously inadequate that termination
might be imminent. . . ."

Request for Review 1 (quoting Final Agency Action Case No. 01-0002 at 3-4).
He also contends that the United States Trustee did not take into account that
he now enjoys clerical support, as opposed to 1999, when he did not have clerical
support and "the majority of the deficiencies occurred." Request for Review 1-2.

The United States Trustee timely filed a Response dated September
26, 2001. Her response addresses the trustee's two arguments of inadequate notice
and failure to consider the trustee's current use of clerical support, and argues
that the facts of Final Agency Action Case No. 00-0002 are distinguishable from
the present termination.

The documents referenced above, and their accompanying exhibits,
constitute the record in this case.

Standard of Review

In conducting this review, the Director must consider two factors:

(1) Did the United States Trustee's decision constitute an appropriate
exercise of discretion; and,

(2) Was the United States Trustee's decision supported by the record.

See 28 C.F.R. § 58.6(i) (specifying the scope of the Director's review).
Even though the trustee does not appear to substantively contest the factual basis
for his termination, I will nevertheless independently review the decision to
terminate the trustee under the above-quoted standard.

Analysis

I. THE DUTIES OF THE UNITED STATES TRUSTEE AND CASE TRUSTEE

United States Trustees supervise panel trustees, 28 U.S.C. §
586(a)(1), and appoint them to individual chapter 7 cases. 11 U.S.C. §
701. United States Trustees carefully "monitor the performance of panel members
. . . in order to determine whether they should be continued in or removed from
panel membership." H.R. Rep. No. 95-595, at 102 (1977), reprinted
in 1978 U.S.C.C.A.N. 5963, 6063. Under the law, "[t]he United States trustee
is permitted to conduct his own investigation . . . to exercise effective supervision
and make an effective evaluation of the performance of the private trustees
on the panel." Id. at 110, 1978 U.S.C.C.A.N. at 6071.

Case trustees are fiduciaries with wide-ranging responsibilities
to effectuate the goals of the particular chapter under which a bankruptcy case
is filed. Because they are fiduciaries, trustees are also held to very high
standards of honesty and loyalty. See generallyWoods v. City National
Bank & Trust Co., 312 U.S. 262, 278 (1941); Mosser v. Darrow,
341 U.S. 267 (1951). See alsoMeinhard v. Salmon, 249 N.Y. 458, 464,
164 N.E. 545, 546 (1928) (Cardozo, C.J.). A trustee also has the duty of exercising
reasonable care in his custody of estate property unless relieved of such duty
by agreement, statute, or order of court. United States ex rel. Willoughby
v. Howard, 302 U.S. 445, 450 (1938).

II. THE DECISION TO TERMINATE SHOULD BE UPHELD

A. The trustee was put on adequate notice that the United
States Trustee was considering corrective action

The trustee argues that his recent performance review, and other documents
upon which the United States Trustee based her decision, did not place him on
notice that his "appointment was in jeopardy." Request for Review 1. This argument
is not supported by the record. The United States Trustee has expressed concern
over, and taken corrective action against, the trustee over a two-year period,
culminating in his termination.

The trustee first received notice of problems with his performance
when he received a six-month appointment (as opposed to the usual one-year appointment)
on July 1, 1999 to the panel of trustees. Subsequently, the trustee received
a report of an audit conducted by the Office of Inspector General, U.S. Department
of Justice. Notice of Termination Collective Exhibit 2 (OIG audit). The report
set forth numerous deficiencies, including reporting errors on Forms 1 and 3
(2), a failure to indicate monthly reconciliation of trust accounts,
and a failure to document asset values. Id. The trustee's evaluation,
dated November 30, 1999 found the trustee's performance "inadequate" in the
preparation of Trustee Final Reports and Distribution Reports and "adequate,
except for" in the areas of securing estate property, preparing 180-day reports,
and responding to audits. Notice of Termination Collective Exhibit 2 (Trustee
Performance Review). As a result of these problems, the trustee's appointment
was again renewed for only a six-month period. Notice of Termination 5. The
trustee continued to receive six month appointments until his termination.

In order to determine whether the trustee had resolved his deficiencies,
the United States Trustee ordered her staff to conduct a Case Administration
Review ("CAR") in May of 2000. Id. The trustee received a report
of the CAR findings on June 7, 2000 detailing a number of continuing deficiencies
in more than 25 cases. The report concluded:

In summary, it does not appear that the Trustee is timely in administering
the estate after attending the 341 meeting. There is little evidence of review
of claims to determine the legitimacy of secured claims. Also, there is little
evidence of the Trustee's investigation of the financial affairs of the debtor.
Unscheduled assets may go undetected even though procedures are available to
disclose the assets. In many instances, assets have remained in the control
of the debtor. The Trustee cannot protect against the unauthorized disposition
of those assets.

Additionally, the Trustee has failed to keep his cases earning interest income.[
(3)] The Trustee's Forms 1 are not in accordance with the Handbook.
The Trustee is not closing cases as expeditiously as possible. Further, it
appears the Trustee is not pursuing assets except at the urging of other interested
parties including the U.S. Trustee.

Notice of Termination Collective Exhibit 4 (CAR 14-15). As a result of these continuing
deficiencies, the trustee voluntarily agreed to a suspension of the assignment
of future cases from July 1 to September 30, 2000. Notice of Termination Collective
Exhibit 5. The trustee was ultimately returned to rotation on October 11, 2000
(4), but with the following caveat:

Please be aware, however, that your return to rotation is tempered
by the fact that the consequences, if any, caused from the delay in case administration
will be evaluated on a case by case basis and dealt with accordingly.

The trustee's evaluation dated December 18, 2000 once again found
that the trustee's performance "adequate, except for" in a number of areas.
Notice of Termination Collective Exhibit 7 (Trustee Performance Review 1). The
United States Trustee noted in the evaluation:

. . . it is recommended that the trustee be reappointed for a six
month period commencing January 1, 2001 through June 30, 2001. Prior to the
end of the six month appointment, the United States Trustee will conduct another
Case Administration Review to ensure that all cases are being timely and appropriately
administered.

Id. (Trustee Performance Review 2). Another CAR was conducted during the
week of June 4, 2001. Notice of Termination Collective Exhibit 8 (June 22, 2001
letter to trustee). The CAR reviewed 25 cases, 10 of which were filed in 2000
and 2001. The results of the CAR continue to reflect serious ongoing concerns
about the trustee's attentiveness and willingness to timely administer assets:

There is little evidence of the Trustee's investigation of the financial
affairs of the debtors.

It does not appear that the Trustee is actively pursuing assets, converting/reducing
assets to money, administering the cases he is appointed to, and closing these
cases expeditiously based on the requirements of the Bankruptcy Code. This
is in spite of the findings in the June 2000 Case Administration Review which
faulted the Trustee for this inactivity in pursuing assets and his non-compliance
with the Handbook.

Id. (2d CAR).

Based upon this two-year period of increased scrutiny, the trustee's
appointment to six-month terms, his voluntary suspension, and his opportunity
to respond to all CAR reports and other correspondence outlining the United
States Trustee's concerns, I conclude that the trustee was on adequate notice
that he could be subject to corrective action including termination. The United
States Trustee is not required to include the magic word "termination" in correspondence
and evaluations before actually seeking to terminate a trustee.
(5) In this regard, the trustee misconstrues the purport of Final
Agency Action Case No. 01-0002 which reversed the termination of a trustee.
In that case, I concluded that the United States Trustee failed to establish
two of the three grounds in support of her action against the trustee. Final
Agency Action Case No. 01-0002 at 3. The only deficiency remaining was one of
reporting, and the United States Trustee's decision had not determined whether
corrective actions undertaken by the trustee had resolved the deficiency. Id.
at 14-15. Finally, the only document discussing these perceived deficiencies,
a report of a Case Administration Review, was issued on the same date as the
Notice of Termination - seven months after the underlying Case Administration
Review. Id. at 7. In contrast, the trustee in this matter has been
repeatedly notified of deficiencies and granted ample opportunity to change
course.

B. The decision to terminate was supported by the record and
was an appropriate exercise of the United States Trustee's discretion

As discussed above, the trustee was the subject of two Case Administration
Reviews, conducted one year apart. The first CAR found little evidence that the
trustee conducted any investigation of assets in his cases. Notice of Termination
Collective Exhibit 4 (CAR 14-15). In order to improve his administration of cases,
the trustee agreed to a three-month suspension. Notice of Termination Collective
Exhibit 5. The trustee was reappointed to another six-month term while another
CAR would be performed.

Unfortunately for the trustee, the second CAR report concluded
that the trustee continued to abdicate his responsibility to investigate and
administer assets, "in spite of the findings in the June 2000 Case Administration
Review which faulted the Trustee for this inactivity in pursuing assets and
his non-compliance with the Handbook." Notice of Termination Collective Exhibit
8 (2d CAR). For example, the second CAR report found serious deficiencies in [M],
a case filed on March 27, 2000. The petition listed numerous assets with net
values after subtracting secured claims, and the debtors confirmed the existence
of assets to be administered. Id. The trustee filed a Report of
No Distribution ("NDR") the day after the meeting of creditors. Id.
The NDR was later withdrawn after the trustee received $11,175.83 from the proceeds
of a foreclosure sale. Id. The debtors also disclosed to the trustee
that they had collected $180,000 in insurance proceeds prior to filing, but
only $33,000 remained. Id. The trustee did not investigate the disposition
of these proceeds, Id., and did not object to the debtors' claimed
exemptions. (6) Notice of Termination Collective
Exhibit 9 (Aug. 24, 2000 email to trustee). As of the date of the second CAR
(some fourteen months after filing), there was no evidence that the trustee
had examined, investigated, or sought to recover assets, except for the debtors'
pontoon boat. Id. Collective Exhibit 8 (2d CAR). The trustee did
not take possession of the boat until December, and sold it in January 2001
(eight months after the case was filed) for $12,496.41. Id. Collective
Exhibit 9 (Summary Report 4). This delay raises questions that the trustee does
not answer regarding the boat's continued depreciation, control of the boat
(in other words, were the debtors given the benefit of using the boat all summer?),
and whether a sale in midwinter versus early summer would have obtained a better
price. Id.

The trustee also failed to administer assets in [S],
a case filed on November 12, 1998. The first CAR report stated that the Form
1 listed several assets with value, but that as of May 10, 2000, there was no
evidence that the trustee had independently valued assets, reviewed claims,
or even taken control of the listed assets. Id. Collective Exhibit
4 (CAR) at 11. The trustee's records even included the notation "all vehicles
are uninsured." Id. When another CAR was conducted in 2001, no change
was found. The trustee had not pursued liquidation of five vehicles, had taken
no action to value or pursue a counterclaim and accounts receivable, and had
taken no action with regard to real estate valued at $395,000 and three time
shares. Id. Collective Exhibit 8 (2d CAR). The trustee also had
taken no action to investigate certain transfers and stock sales occurring within
one year of filing. Id. The trustee did not even require the debtor
to turn over his tax returns until August of 2000, and did not actually receive
the returns until June of 2001. Id.

The two cases discussed above from the second CAR report are representative
of the trustee's failure to administer assets. Other cases reviewed in the second
CAR report, such as[T], [P], and [G], also demonstrate
that the trustee has failed to administer assets. Id. In [P]
and [G], the assets not administered consisted of publicly-traded stock,
assets that can be readily liquidated. Id. I conclude that the trustee's
history of inadequate administration, in conjunction with his failure to significantly
improve his performance between the first and second CAR reports, support a
decision to terminate future case assignments. I agree with the United States
Trustee that the trustee's lack of clerical support should not be a defense.
A clerical employee would have assisted in the preparation of timely and accurate
forms, but would not have cured the trustee's continued failure to investigate
or administer estate assets. After providing a trustee with an adequate opportunity
to correct deficiencies "a United States Trustee may appropriately choose to
terminate a trustee who does not demonstrate marked improvement." Final Agency
Action Case No. 01-0003 at 8.

Conclusion

Based upon my review of the record, including the written submissions
of the United States Trustee and the trustee, I affirm the United States Trustee's
decision to terminate the trustee's eligibility for assignment to chapter 7
cases.

The foregoing conclusions and decisions constitute final agency
action in this matter.

[FOOTNOTES]

1. The trustee continued to receive new case assignments
during the pendency of this review. 28 C.F.R. 58.6(c).

2. "Form 1" is a record of estate assets; "Form 3" is a
summary report of all asset cases under a trustee's administration. The trustee
must file these forms, together with "Form 2" (cash receipts and disbursements),
semi-annually with the United States Trustee. See U.S. Dep't of
Justice, Exec. Office for U.S. Trustees, Handbook for Chapter 7 Trustees,
9-7 and Forms (March 1, 2001). All three of these forms are referred to as "180
day" reports. Id.

3. A trustee can be held personally liable for a failure
to deposit estate funds in an interest-bearing account. E.g., In
re Charlestown Home Furnishing, 150 B.R. 226 (Bankr. E.D. Mo. 1993).

4. The trustee's continued suspension from October 1 to
October 10 did not comply with 28 C.F.R. § 58.6. However, the trustee did
not raise this matter in the instant review.

5. Nor can the trustee rely on his 2000 Performance Review
in support of his entitlement to continued service. The legend at the bottom
of the summary page of the evaluation states in part "The renewal of the trustee's
appointment to the chapter 7 panel is based upon a variety of factors, including
this performance review. Nothing in this review should be construed as a guarantee
of future reappointment." Notice of Termination Collective Exhibit 7 (Trustee
Performance Review).

6. The trustee's only defense to the failure to object is
the cryptic statement that "The attorney for the debtors has maintained an agreement
with me to finalize the filing of the claimed exemptions. If the amendments
are inappropriate I will file an objection within the allotted time period."
Notice of Termination Collective Exhibit 8 (July 23, 2001 of trustee). There
is no need for the debtor to "finalize the filing" of the exemptions. The original
claimed exemptions are final because no timely objection had been filed. Taylor
v. Freeland & Kronz, 503 U.S. 638 (1992). Apparently, an amended schedule
of exemptions was filed in this case. Docket, [M]. Based upon the
record, the trustee's apparent misfeasance in a number of reviewed cases may
have caused a loss to the estate, which should be investigated.